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J Sainsbury plc, SSE plc, Tullow Oil plc and Premier Oil plc: How Long Can The Recovery In These Shares Last?

Sainsbury’s

Sainsbury’s (LSE: SBRY) surprised the markets on Wednesday, by saying it now expects full-year underlying pre-tax profits will be “moderately ahead” of market expectations of £548 million. Sainsbury’s does not usually make comments on profits in its September trading update, so it must surely be very significant, otherwise management would not depart from its usual practice. The market has really taken this as a sign that trading conditions for the supermarket are beginning to improve, and its shares have climbed 11.9% higher since.

Declines in same store sales in its second financial quarter slowed to 1.1%, which was significantly lower than the 2.1% decline in the preceding quarter. And, although food deflation continues to put pressure on total sales, volumes and transactions have been growing steadily, particularly from online and non-food sales.

This week’s update seems to confirm that Sainsbury’s turnaround is firmly on track, but investors should not expect a smooth ride.

SSE

Earlier this week, SSE (LSE: SSE) said it now expects adjusted pre-tax profits in the first half of 2015/6 will be significantly higher than last year, with much of the improvement due to its supply business. Weather conditions were relatively benign over the summer period, and this should mean electricity generated from renewable sources were at higher levels than usual.

The announcement was certainly positive news, but management is not any more optimistic about the longer run. “SSE continues to manage a wide range of issues across its Wholesale and Retail businesses and, therefore, relatively good performance in these segments in the first six months does not change its outlook for the financial year as a whole”, the company said in a statement on Tuesday.

SSE continues to expect adjusted earnings per share for 2015/16 will be at least 115 p. It also reaffirmed its commitment to grow its dividend by at least RPI inflation annually. This should imply SSE’s shares trade at a forward P/E of 13.1 and a prospective dividend yield of 6.0%.

So, although there is no long term improvement to the outlook on earnings, SSE’s low valuation multiples should mean shares in utility giant could climb higher still.

Tullow Oil and Premier Oil

Oil shares have bounced back this week, despite the oil price extending recent losses. Tullow Oil (LSE: TLW) and Premier Oil (LSE: PMO), which were some of last week’s biggest fallers, bounced back by 13.5% and 4.6%, respectively, over the past week.

The share prices of many oil companies have staged mini-rallies over the past several months, but almost always, these shares soon fall to new lows. With oil production rising almost everywhere, whilst demand from emerging markets is slowing down, the likelihood of a sustained recovery in oil prices seems very remote.

But although oil prices seem set to stay lower for longer, shares in Tullow Oil and Premier Oil may not have much further to fall. Already, the market is valuing these stocks more realistically, with the assumption that long term crude oil prices would be around $60-65, compared to $70-75 in August.

This should mean shares in Tullow Oil and Premier Oil would be poised to benefit from an improvement in market sentiment in longer term oil prices. But unfortunately, the outlook for longer term oil prices remains uncertain.

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Jack Tang has a position in J Sainsbury and Tullow Oil. The Motley Fool UK has recommended Tullow Oil. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.